Trends and Predictions in Canadian Proxy Contests

Kingsdale Shareholder Services has released its 2014 Proxy Season Review. In its report, Kingsdale discusses trends observed in 2014, predictions for the future, and gives its key recommendations for companies in the Canadian marketplace. In reviewing 2014 and comparing it to the previous year, Kingsdale observes:

By the numbers – the total number of proxy contests observed in 2014 remained at the elevated level seen beginning in 2008, but was down slightly from 2013. Kingsdale suggests a number of factors for the relative decline, including stronger capital markets which have helped to mask under-performers’ deficiencies, the implementation of structural defences such as advance notice policies and shareholder rights plans, and the increasing settlement of activist challenges at an early stage before the contest becomes public.

Say on Pay – the number of companies adopting Say on Pay continued to rise in 2014, and a major development in this area was the introduction of Glass Lewis’s new quantitative Pay for Performance model. Glass Lewis grades companies’ quantitative pay and performance alignment on a scale of “A” to “F”, using five performance oriented metrics and two pay oriented metrics to compare and rank the company against peers.

Advance notice policies – interest in advance notice policies continued to grow, but the rate of adoption slowed from the rush seen in 2013. Two developments in 2014 in this area were a policy change by ISS to recommend a vote against policies which state that an adjournment or postponement of the meeting does not start a new notice period, and a decision of the Ontario Superior Court reaffirming the defensive purpose of advance notice policies to protect shareholder rights and ensure an informed vote.

Poison Pills – a decision of the British Columbia Securities Commission approved the re-ratification of a poison pill by shareholders in the face of a bid and permitted the pill to remain for a longer period than has previously been the norm, opening up a new possible defensive tactic for target companies.

M&A – merger activity returned in 2014, and activist investors continued to be a live factor in the transactional space. The possibility of activist challenges pushed more companies to involve special committees from the outset and to ensure a well-documented process.

Looking ahead, Kingsdale identifies three trends it expects to see play a large role moving forward:

Channels of communication – shareholders increasingly want to talk to and be spoken to by directors, not just management. Investors are recognizing the value of dialogue and the potential to unlock better performance and better returns.

Gender diversity – with over half of TSX-listed issuers having no women on their board and only 3% having three or more, regulators are considering a number of possible reforms to promote or mandate greater representation of women on corporate boards, and some companies such as BMO have already moved to make changes in this area. Coupled with evidence that more women on a board can mean improved returns for shareholders, gender diversity in the boardroom is set to become the next big corporate governance issue.

Activists as collaborators – companies and other shareholders are increasingly willing to see activists as potential allies to help unlock value. Activists today are more flexible and often willing to reach collaborative solutions, and this trend is expected to continue.

Kingsdale’s recommendation to Canadian issuers is above all to be proactive – a board that learns about weaknesses in its corporate governance or dissatisfaction amongst its investors from an activist faces a serious risk of losing their company, whereas an issuer that identifies vulnerabilities in advance and fixes them may never even become a target. Specifically, Kingsdale advises:

Know your company – a responsible issuer should continually review its best practices, update its by-laws, and examine the flash points such as management issues, undervalued assets, cost structure, transaction opportunities and performance against peers.

Know your investors – too many issuers rely on anecdotal evidence and “feel”, and fail to get empirical data about what their investors think. Objective information about what is being said and who is saying it allows companies to head off problems, position themselves for success if a challenge materializes, and may also provide new insights on how to drive share price.

Be prepared – companies should engage a legal team and shareholder advisory firm as soon as they receive an indication that an activist is looking for a foothold. Companies are also advised to strike a special committee early, to both demonstrate that the board is serious about maximizing shareholder value and to help to insulate the board and management from the distraction of a proxy contest.

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